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Under a costs order VAT is recoverable on the costs being paid unless the party receiving the costs is a business registered for VAT. In that event that party will recover the costs through their VAT return in the normal way, and then just recover the net of that amount from the paying party. In other words, VAT is claimed back from the government or the payer, not both.

Sometimes a VAT registered person is only entitled to claim a proportion of their VAT back through the VAT return, not all of it. In that event they can claim the rest from the payer.

If the payer has to reimburse VAT to the recipient under a costs order the payer is not entitled to reclaim that VAT from the government even if they are a VAT registered business. This is because VAT can only be reclaimed by VAT registered businesses on services tended to that business, whereas in this situation the services have been tendered to the opponent.

For the same reason the successful party's lawyer cannot issue a VAT invoice to the opponent simply because the opponent has been ordered to pay the costs. A lawyer's invoice must always go to the lawyer's own client. There is no objection to putting on the bill a note to the effect that it is payable by the opponent, but that does not make it a VAT invoice in the hands of the opponent and the opponent remains unable to reclaim the VAT on it.